Japan's construction output disappoints

Emily Nicol
Chris Scicluna

Overview:
With the US House of Representatives following the Senate in strongly backing the draft legislation supporting the Hong Kong protestors, and President Trump expected to sign it perhaps as soon as today, Asian markets early on today were in risk-off mode, with major stock indices marking declines across the board and USTs making gains. But a subsequent report that China’s chief trade negotiator Liu He had commented that he was ‘cautiously optimistic’ about prospects for a first-phase trade deal with the US reversed some of the negativity.

The change in direction of Japanese stocks was among the most marked – with the yen reversing its early appreciation on the report, the Topix also subsequently pared almost all of its early near-1½% loss to close down just 0.1% on the day. Most other major Asian stock markets fared less well, moving sideways for much of the afternoon session rather than recovering lost ground. So, China’s CSI300 closed down ½%, with the Hang Seng currently down 1.4%. But USTs reversed most of their early gains – having prior to the Liu He report fallen below 1.71% for the first time since Halloween, 10Y UST yields are now back above 1.74%. Euro area govvies have opened only modestly firmer, e.g. 10Y Bund yields are down 1bp from the close to -0.36%, having been below -0.38% this time yesterday.

Ahead of the release later on of the usual weekly US jobless claims data, today’s economic data have so far been relatively underwhelming, with some weak Japanese construction output numbers and a so-so French business survey. And just as yesterday’s FOMC minutes were relatively unenlightening (most officials judged that policy "would be well calibrated" in the absence of new information that would cause "a material reassessment"), the ECB’s Governing Council meeting account due later today also seems unlikely to change expectations with regards to the rate outlook. of the outlook.

Japan:
While the first estimate of Q3 GDP last week reported an underwhelming performance in Japan’s economy last quarter – growth of 0.1%Q/Q was the softest pace for a year – and only limited evidence of front-loading of demand ahead of October’s consumption tax hike, today’s all industry activity figures suggested otherwise, with a significant pickup in activity at the end of the third quarter. Indeed, total output jumped 1½%M/M in September, the strongest monthly increase since April 2017, to leave it almost 3% higher compared with a year earlier.

Within the detail, the improvement principally reflected a surge in tertiary activity that month (1.8%M/M), as retail trade (particularly in household appliances) surged 8½%M/M, while wholesale trade was up more than 3%M/M. There were also solid increases in hotel and tourism-related services (up 8½%M/M and 3%M/M respectively) as Japan geared up for the Rugby World Cup. So, over the third quarter as a whole, total tertiary activity rose 0.8%Q/Q, up from growth of 0.2%Q/Q in Q2.

But while manufacturing output also bounced back in September (1.7%M/M), it was still down over the quarter as whole, with the 0.6%Q/Q contraction largely reversing the increase seen in Q2. And today’s release showed a particularly disappointing performance from the construction sector, with activity falling for the fourth consecutive month in September and by a steeper 2.2%M/M. Indeed, private sector non-residential work was down for the fifth consecutive month (-0.6%M/M), while residential work slumped (-3.8%M/M) to its lowest level since 2015, thus confirming that there was no repeat of the surge in housing activity (seemingly related at least in part to inheritance tax planning) that came ahead of the last tax hike in 2014. Public sector building and civil engineering similarly maintained the recent downward trend, to leave total construction output down more than 2%Q/Q in Q3.

Of course, given that services accounts for roughly three-quarters of Japan’s economic output, all industry activity still recorded steady expansion over the third quarter as a whole, with growth of 0.3%Q/Q, down just 0.1ppt from Q2 and suggestive of a potential modest upwards revision to the first estimate of Q3 GDP growth.

Euro area:
The account of the ECB’s October policy meeting is due for release today. But – if the respective press conference was anything to go by – that might be a non-event. Datawise, ahead of tomorrow’s flash PMIs, some attention today will be on the European Commission’s flash consumer confidence indicator for November. In line with the oscillating trend seen since the start of the year, this is expected to report a modest increase this month by 0.4pt to -7.2, to remain well within the recent narrow range.

This morning also brought the first major November business sentiment survey from a member state, with the French INSEE survey suggesting that on the whole conditions remained stable this month. Indeed, the headline business climate index moved sideways at 105, comfortably above the long-run average, with the turning point indicator consistent with a broadly favourable economic outlook. But while there was an improvement in the headline manufacturing business climate index, which increased 1pt to 100 back in line with the long-run average, this was still the second-lowest reading since March 2014, with manufacturers on the whole suggesting that production prospects had worsened again, and the sector’s turning point indicator implying an unfavourable economic outlook.

The INSEE survey signalled a more notable improvement in retail conditions (the relevant index was up 2pts to 107, a twelve-month high) due to renewed optimism on order intentions in the sector. Conditions in the services sector remained stable (the index moved sideways at an above-average 105) as firms were more upbeat about expected activity. And while the headline construction business climate index slipped back, at 111 it remained well above the long-run average and consistent with steady expansion.

In the markets, France and Spain will sell bonds with various maturities.

UK:
The UK news flow will continue to be dominated by politics, with the Labour party due to unveil its election manifesto today. Reports this morning suggest that oil companies would face a windfall tax, while higher earners and banks would also be in the party’s crosshairs. Of course, a majority Labour government after the election seems an impossible prospect. And should Labour come to power with a minority administration, its ability to deliver much of its manifesto (apart from a second Brexit referendum) would seem in doubt.

On the data front, today will bring the latest public sector finance figures. These are expected to show that net borrowing in October was higher than a year earlier. Of course, the fiscal policy pledges of the main two political parties suggest that the underlying state of the public finances is likely to deteriorate further over the coming year too.

US:
In the US, this afternoon will bring existing home sales figures for October, the Conference Board’s leading indicators for the same month and the Philly Fed index for November. In the markets, the Treasury will sell 10Y TIPS.

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